Role of government_y

The Role of The Role of GovernmentGovernment

Economic Functions of GovernmentEconomic Functions of Government√ √ Legal and Social FrameworkLegal and Social Framework

• • provides legal framework and services provides legal framework and services needed for a market economy to function needed for a market economy to function efficiently.efficiently.

• • sets “rules of the game” governing sets “rules of the game” governing business relationships such as contract business relationships such as contract enforcementenforcement

• • services like police powers, weights services like police powers, weights and measures, and system of moneyand measures, and system of money

• • agencies that protect consumer and agencies that protect consumer and regulate businessesregulate businesses

Economic Functions of GovernmentEconomic Functions of Government

√ √ Maintaining CompetitionMaintaining Competition• • actions that encourage competition actions that encourage competition

in order to promote efficiency to provide in order to promote efficiency to provide low prices and an adequate quantity of low prices and an adequate quantity of goods for consumersgoods for consumers

• • Regulation and ownership controlsRegulation and ownership controls • • Anti-monopoly lawsAnti-monopoly laws


√ √ Redistribution of IncomeRedistribution of Income• • providing for those unable to do so providing for those unable to do so

themselvesthemselves • • transfer payments such as welfare, transfer payments such as welfare,

SS payments, food stamps; unemployment SS payments, food stamps; unemployment compensationcompensation • • market intervention such as price market intervention such as price

controls or price supportscontrols or price supports • • sharing the wealth of the nation sharing the wealth of the nation

through income-based taxationthrough income-based taxation

Economic Functions of GovernmentEconomic Functions of Government√ √ Reallocation of ResourcesReallocation of Resources • • measures to correct over- and under-allocation of measures to correct over- and under-allocation of resourcesresources • • Externalities or Spillovers occur when some of the Externalities or Spillovers occur when some of the costs or the benefits of the good or service are passed on costs or the benefits of the good or service are passed on to parties other than the immediate buyer or seller.to parties other than the immediate buyer or seller.

Negative Externalities or spillover costsNegative Externalities or spillover costs√ √ production or consumption costs inflicted on a third production or consumption costs inflicted on a third party without compensation; pollution of air, water are party without compensation; pollution of air, water are examplesexamples

Positive Externalities or spillover benefitsPositive Externalities or spillover benefits√ √ production or consumption costs conferred on a production or consumption costs conferred on a third party or community at large without their third party or community at large without their compensating the producer; education, vaccinations compensating the producer; education, vaccinations are examplesare examples

Economic Functions of GovernmentEconomic Functions of Government√ √ Provider of Public Goods and ServicesProvider of Public Goods and Services

• • providing goods and services to society providing goods and services to society that the private sector is not willing or able to that the private sector is not willing or able to provideprovide

√ √ private goods are subject to private goods are subject to exclusion exclusion principleprinciple—those unable or unwilling to pay do —those unable or unwilling to pay do not get the product.not get the product.

√ √ exclusion principle does not apply to exclusion principle does not apply to public goods—there is no effective way to public goods—there is no effective way to exclude individualsexclude individuals

Economic Functions of GovernmentEconomic Functions of GovernmentWhat goods and services should be What goods and services should be

provided by Gov’t?provided by Gov’t?Two principles apply:Two principles apply:

1. Nonexclusion 1. Nonexclusion

√ √ no effective way to exclude no effective way to exclude individualsindividuals

2. Shared Consumption2. Shared Consumption

√ √ one person’s use does not reduce one person’s use does not reduce usefulness to othersusefulness to others


NONO YESYES

YYEESS

Pure PrivatePure PrivateBreadBread

Ice creamIce cream

Toll GoodsToll GoodsTheatresTheatres

ParksParks

N N OO

Common PoolCommon Pool ResourcesResources

Irrigation waterIrrigation waterFish in the riverFish in the river

Pure PublicPure PublicNational defenseNational defense

Flood controlFlood control

Exc

lus i

onE

xclu

s ion

Shared ConsumptionShared Consumption


Public or Private?Public or Private?College Education?College Education? Interstate Highway System?Interstate Highway System?

Electric Power?Electric Power? Elementary Schools?Elementary Schools?

National Defense?National Defense? Police Protection?Police Protection?

Groceries?Groceries? Garbage collection?Garbage collection?

Water?Water? Recreational Facilities?Recreational Facilities?

Postal Service?Postal Service? Sporting Facilities?Sporting Facilities?

Prisons?Prisons? Flood Control?Flood Control?

Economic Functions of GovernmentEconomic Functions of Government√ √ Provider of Public Goods and ServicesProvider of Public Goods and Services • • Quasi-public GoodsQuasi-public Goods—goods and services —goods and services produced and delivered in such a way that the produced and delivered in such a way that the exclusion principle applied even though the private exclusion principle applied even though the private sector could offersector could offer

√ √ Often, government will provide these g/s since Often, government will provide these g/s since private sector may tend to underallocate private sector may tend to underallocate resources for their production; Medical care and resources for their production; Medical care and public housing are examples. public housing are examples.

• • Allocation of resources to public and quasi-Allocation of resources to public and quasi-public goods—government spending, taxing policies, public goods—government spending, taxing policies, and manipulating interest rates are the ways and manipulating interest rates are the ways government can shift resource use.government can shift resource use.


√ Promoting Stability

• Use of Fiscal and Monetary Policy

Unemployment

Inflation

Land, Labor, Capital & Entrepreneruial Ability to bs and govt

Resource Money Payments paid by bs. and govt

Goods and Services for Households and Government

Money Payments for goods and services from government and households

HouseholdsBusinesses Government

Bs. Taxes

Subsidy

Taxes

Transfers

Federal Finance—Federal Finance—Expenditures• Social Security• National Defense• Health• Interest on Public

Debt• Other Entitlements• Other mandatory

2002 Data

TotalExpenditures$2,011 Billion

2002 Data

Federal Finance—Federal Finance—Federal Tax Revenues

Total Tax RevenuesTotal Tax Revenues$1,853 Billion$1,853 Billion

2002 Data

•Social Insurance Social Insurance ReceiptsReceipts

•Personal Income TaxPersonal Income Tax

•Corporate Income Corporate Income TaxTax

•Excise TaxExcise Tax

•OtherOther

State RevenuesSales & Excise Taxes ~ 47%State Income Taxes ~ 34%Corporate Income Taxes ~ 7%License Fees ~ 6%Other taxes ~5%Non-tax sourcesNon-tax sourcesLotteriesLotteriesIntergovernmental Grants Intergovernmental Grants State Owned Utilities/Stores State Owned Utilities/Stores

State FinanceState Finance

State ExpendituresEducation ~ 36%Public Welfare ~ 25%Health and Hospitals ~ 8%Highways ~ 8%Public Safety ~ 5%

State FinanceState Finance

Local FinanceLocal FinanceLocal Revenues

Property Taxes 72%Sales & Excise Taxes 17%

Education 44%Welfare, Health, and

Hospitals 12%Public Safety 11%Housing, Parks, 8%and Sewerage Highways 5%

Local Expenditures

Role of government_y

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